Four arrangements wearing one word
Someone offers ten percent of the first year if you bring them a customer. Or you offer the same to a consultant who knows a program office. The document is a page long and the money looks free from both sides of the table. Whether that page is enforceable, allowable, and lawful turns on facts that almost never appear in it: who the end buyer is, what the payee actually did, and whether payment depends on winning. Commercially the answer is usually yes with conditions. On federal work it changes shape, because the government has a specific rule about paying anyone a fee contingent on getting a contract.
Start by separating the four things people mean. An introduction fee is flat, paid once, for a warm introduction to a named person, and earned when the meeting happens. A finder's fee is contingent: a percentage payable when a deal closes. A sales agency or commission arrangement is ongoing, with an account list or a territory, and an expectation that the agent sells rather than points. Revenue share or channel margin puts the payee inside the transaction, reselling under its own paper or taking a slice of recurring revenue for continuing work.
These are not four names for one thing. They differ on the two variables every rule below keys on: whether payment is contingent on an award, and whether the payee runs a real selling business or is one person with access. A firm that signs a document titled "Referral Agreement" and then behaves like a sales agent carries the exposure of a sales agent. The title on the page is the least load-bearing thing in it.
Which facts decide whether a referral fee can be paid at all
Editorial ranking of how often each fact is dispositive rather than merely relevant, drawn from the cited statutes and regulations. Illustrative, not a measured statistic.
Read that as ordering, not a scorecard. The top four can end an arrangement outright; the bottom two more often turn a clean deal into a disclosable one.
The covenant that makes federal work different
FAR subpart 3.4 exists for exactly this situation, and it is short. FAR 3.400 restricts contingent fee arrangements to those permitted by 10 U.S.C. 3321(b)(1) and 41 U.S.C. 3901. FAR 3.401 defines a contingent fee as "any commission, percentage, brokerage, or other fee that is contingent upon the success that a person or concern has in securing a Government contract." Commission and percentage are named in the text. A finder's fee on a federal award is the thing the rule is about.
FAR 3.404 tells the contracting officer to insert clause 52.203-5, Covenant Against Contingent Fees, in solicitations and contracts exceeding the simplified acquisition threshold, other than those for commercial products or commercial services. The clause is a warranty by the contractor: "no person or agency has been employed or retained to solicit or obtain this contract upon an agreement or understanding for a contingent fee, except a bona fide employee or agency." Breach lets the government annul the contract without liability, or deduct or recover the full amount of the fee.
FAR 3.405 covers what follows when the government believes the warranty was broken: rejecting the bid or proposal, annulling the contract, suspension or debarment, and referral to the Department of Justice. Those remedies reach the contract itself and the ability to hold future ones.
Bona fide agency is a test about the agency, not about the fee
The exception swallows a lot of legitimate business, which is why the definitions matter more than the prohibition. FAR 3.401 defines a bona fide agency as "an established commercial or selling agency, maintained by a contractor for the purpose of securing business, that neither exerts nor proposes to exert improper influence." A bona fide employee is "a person, employed by a contractor and subject to the contractor's supervision and control as to time, place, and manner of performance," with the same clean-hands requirement. Improper influence means any influence that induces or tends to induce a government officer or employee to act on a contract on any basis other than the merits.
Weigh the words one at a time. Established. Commercial or selling agency. Maintained. A manufacturer's representative firm with a book of principals, a payroll, an office, and years of selling history clears that description. A recently retired program manager with a one-page agreement and a percentage does not, and the second arrangement is the one offered most often, usually with good intentions on both sides.
The employee branch is cleaner and underused. Supervision and control over time, place, and manner of performance is the same test that separates an employee from a contractor everywhere else in American law. A firm that wants a business development person paid partly on results can hire one. What it cannot do is call an outside individual a bona fide employee while exercising no control over the work.
The same question, answered by setting
Referral arrangements go wrong because the answer flips depending on who ultimately pays. Each row below assumes a fee payable only if a deal closes, because that is the structure people actually propose.
| Setting | Success-contingent introduction fee | What governs | The move |
|---|---|---|---|
| Federal prime contract above the simplified acquisition threshold, non-commercial | Restricted. Permitted only where the payee is a bona fide employee or bona fide agency | FAR 3.4 and clause 52.203-5; 41 U.S.C. 3901; 10 U.S.C. 3321(b) | Pay salary, or engage a genuine selling agency and document it. Never a percentage to an individual |
| Federal contract for commercial products or commercial services | The covenant clause is not prescribed, but nothing else relaxes | FAR 3.404 exception; 41 U.S.C. chapter 87; FAR 3.104 | Do not read the exception as permission. Run the same test |
| Federal subcontract | A fee for steering the subcontract award is a kickback | 41 U.S.C. chapter 87; FAR 3.502; clause 52.203-7 | Nobody on the prime's side shares a fee. Buy work, not access |
| Commercial business to business | Generally permitted, and ordinary practice in software and services | Contract law; 16 CFR part 255 where the referral is public | Write it down, define the trigger, disclose the connection |
| Anything reimbursed by a federal health care program | Prohibited unless it fits a statutory exception or safe harbor | 42 U.S.C. 1320a-7b(b) | Counsel before the introduction, not after the invoice |
| An introduction into a capital raise | Transaction-based compensation generally requires broker registration | Exchange Act section 15(a)(1), 15 U.S.C. 78o(a)(1) | Different statute, different specialist |
Kickbacks are the harder rule, and they run in both directions
The Anti-Kickback Act reaches further than the contingent fee covenant, and it applies to the subcontract layer where most partnership money moves. FAR 3.502-1 defines a kickback as "any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind" provided to a prime contractor, a prime contractor employee, a subcontractor, or a subcontractor employee for improperly obtaining or rewarding favorable treatment in connection with a prime contract or a subcontract.
Read the list twice. Fee and commission are in it by name. The word doing the work is improperly: the statute reaches payment for favorable treatment, not payment for services rendered. A subcontractor paying a prime's subcontracts manager a percentage for pointing work its way is inside the statute whatever the memo calls it. One paying a prime a negotiated price for a defined scope is not.
The penalties match. Under 41 U.S.C. 8707, knowing and willful conduct carries a fine under title 18, imprisonment of not more than ten years, or both. Under 41 U.S.C. 8706 the government may recover twice the amount of each kickback plus a civil penalty the statute sets at not more than $10,000 per occurrence, a figure agencies adjust for inflation. FAR 3.502-3 puts clause 52.203-7 in solicitations and contracts exceeding $200,000, excluding commercial products and services, and it obligates the prime to maintain procedures to prevent and detect kickbacks. Contracting officers can offset kickback amounts against payments to the prime or direct withholding from subcontractor payments.
The Byrd Amendment rule people forget
A separate statute covers paying someone to influence the award itself. 31 U.S.C. 1352, implemented at FAR subpart 3.8, prohibits a recipient of a federal contract, grant, loan, or cooperative agreement from using appropriated funds to pay any person for influencing or attempting to influence an officer or employee of an agency in connection with a covered federal action. Profit or fee earned from that action is not appropriated funds, which is the release valve: the work can be paid for, out of the right pocket, with disclosure.
FAR 3.804 requires certifications and disclosures before award of any contract exceeding $200,000, carried into the solicitation by provision 52.203-11 and clause 52.203-12. FAR 3.803 carves out what is not covered: agency and legislative liaison by the offeror's own employees, professional and technical services directly supporting a bid or proposal, and capability presentations made before a formal solicitation exists. Civil penalties run from $10,000 to $100,000 for each prohibited expenditure and each failure to file.
The translation: a consultant paid to open a door at an agency is at minimum a disclosure event, and if the money traces to appropriated funds a prohibited one. Paying a consultant to help write a technically better proposal sits inside the professional and technical services exception. Paying the same consultant to make a phone call to a decision-maker does not.
What a fee can never buy
Bid, proposal, or source selection information. FAR 3.104 implements 41 U.S.C. chapter 21. No person may knowingly obtain or disclose contractor bid or proposal information, or source selection information, before award. A referral partner who arrives with a competitor's pricing has converted a business development conversation into a criminal statute question.
A government employee's goodwill. FAR 3.101-2 bars government employees from soliciting or accepting anything of monetary value from anyone with business before the agency. Clause 52.203-3 lets the agency head, after notice and hearing, terminate the contractor's right to proceed and, on contracts using Department of Defense appropriations, assess exemplary damages of not less than three nor more than ten times the cost of the gratuity.
A recent official's pull on a specific award. Under 41 U.S.C. 2104 a former official who served as procuring contracting officer, source selection authority, evaluation board member, program manager, or administrative contracting officer on a contract exceeding $10,000,000 cannot accept compensation from that contractor for one year. The restriction attaches to the person; a fee agreement does not dissolve it.
Objectivity the buyer is relying on. FAR subpart 9.5 is titled Organizational and Consultant Conflicts of Interest, and FAR 9.501 defines a marketing consultant inside it. Where a firm advises a customer on what to buy and also collects a fee when the customer buys a particular thing, the conflict is structural and disclosure alone may not cure it.
Silence about a problem. Clause 52.203-13 applies where contract value is expected to exceed $7.5 million with a performance period of 120 days or more. It requires a written code of business ethics and conduct within 30 days of award, and timely written disclosure to the agency inspector general of credible evidence of a federal criminal violation involving fraud, conflict of interest, bribery, or gratuities. The substance flows down, making a partner's problem a disclosure obligation on the prime.
Allowability is a separate gate from legality
A fee can be lawful and still be money a contractor cannot bill. FAR 31.205-38 governs selling costs and is direct: sellers' compensation, commissions, and fees are allowable only when paid to bona fide employees or to established commercial agencies maintained by the contractor. The same cost principle treats direct selling as allowable, defining it as person-to-person contact intended to induce a particular customer to purchase a particular product or service, including customer familiarization, negotiation, and technical effort tailored to that customer.
Two consequences. On cost-reimbursement or otherwise flexibly priced work, a commission to an outside introducer who is neither an employee nor an established agency is unallowable, and billing it turns a business decision into a claim problem. On fixed-price work the fee still lands in an indirect pool that gets audited eventually, so the classification question arrives late rather than never.
The commercial side is mostly free, with four exceptions
Outside federal contracting, a referral fee between two companies is ordinary commerce, enforceable like any other contract. Four settings break that rule, and three of them catch technology firms who did not think they were in a regulated industry.
Health care paid for by a federal program. 42 U.S.C. 1320a-7b(b) makes it a crime to knowingly and willfully solicit, receive, offer, or pay any remuneration, including any kickback, bribe, or rebate, directly or indirectly, overtly or covertly, in cash or in kind, to induce referrals or the purchase, lease, or ordering of goods or services paid for under a federal health care program. Conviction carries a fine of not more than $100,000, imprisonment of not more than ten years, or both. Exceptions appear at subsection (b)(3), including amounts paid by an employer to an employee in a bona fide employment relationship. A software vendor paying a percentage to a consultant who steers hospital purchasing is closer to this statute than the org chart suggests.
Introductions into a capital raise. Section 15(a)(1) of the Securities Exchange Act, 15 U.S.C. 78o(a)(1), makes it unlawful to use the mails or interstate commerce to induce or attempt to induce the purchase or sale of any security unless registered as a broker or dealer. The text carries no general carve-out for a person who makes one introduction and takes a percentage of the raise. Whether a limited finder should be exempted has been argued federally and handled unevenly among the states, so this is unsettled ground rather than a solved question.
Anything crossing a border. The Foreign Corrupt Practices Act at 15 U.S.C. 78dd-1(a)(3) reaches a payment to any person while knowing that all or part of it will go, directly or indirectly, to a foreign official. The statute defines knowing to include awareness of a high probability that the circumstance exists, unless the person actually believes it does not. A local agent on a success percentage in a market where officials control the purchase is the textbook exposure, and deliberate incuriosity is what that definition was written to defeat.
Referrals that are also public endorsements. 16 CFR 255.5 requires that a connection between endorser and seller be disclosed clearly and conspicuously where it might materially affect the weight or credibility of the endorsement and the audience would not reasonably expect it. A paid partner writing a public recommendation, or a case study authored by someone collecting a percentage, sits inside that rule.
Terms that make a referral agreement actually work
Assume the arrangement is lawful in its setting. Most referral agreements still fail commercially, in predictable places: ambiguity about what was introduced, when the fee is earned, and what happens when the customer does not pay. The items below turn a handshake into a document two finance teams can process without a call.
- A definition of a qualified introduction. A named person, at a named organization, with a stated role in the decision, plus a meeting that actually occurred. Not a list of logos.
- Registration before contact, with a response deadline. The introducer submits the account in writing; the receiving firm accepts or rejects within a set number of business days, stating the reason for a rejection.
- Earning event separated from payment event. Earned on contract signature, payable on collected cash. That split removes most disputes.
- A defined basis. First-year value net of pass-through hardware, third-party licenses, travel, and taxes. The gap between booked value and net revenue is where the argument lives.
- A registration term and a tail. Six to twelve months of protection, with a stated tail, so a slow procurement does not strip an introducer who did real work.
- Federal exclusions on the face of the document. No fee on any award where the contingent fee covenant applies unless the payee is a bona fide employee or bona fide agency, and none where the introduced person is a government employee.
- No authority to represent. The introducer does not quote prices, sign, commit dates, or receive proposal and pricing material. The clause protects both sides and is the one most often left out.
- Clawback. On a cancellation, refund, or nonpayment, the fee is returned or offset against future fees. Say which.
- Records, audit, and a term. A right to see the calculation, survival for fees already earned, and clean termination on notice.
How the money should move
The sequence below produces the fewest disputes. An introducer should ask for the same shape, because the ambiguity that lets a firm avoid paying is the ambiguity that lets an introducer claim a deal it did not create.
From introduction to paid fee, with the clock on each step
Diligence before accepting a fee from someone else
Being offered a referral fee carries the same exposure as offering one. Five questions answer most of it, and all five fit in one email.
- Who ultimately pays for the work — if a federal agency, directly or through a prime, the covenant and kickback analysis comes first. Ask for the contract vehicle, not just the customer name.
- What the fee is actually for — an introduction, a qualified opportunity, a sale, or continuing account work. If the answer changes depending on who is asked, the agreement is not ready to sign.
- Whether you have any role in the decision — advising the customer, assessing vendors, writing requirements, or sitting on an evaluation makes a fee from a bidder a conflict before it is a compliance question.
- Whether it is disclosed — a disclosed fee almost never damages a relationship; an undisclosed one discovered later usually ends it. Where the referral is public, 16 CFR 255.5 makes disclosure a requirement.
- What happens if the deal goes bad — without a clawback for refunds and nonpayment, an introducer has no reason to care whether the fit was real, and fit is the only thing worth paying for.
Where the money should sit on federal work
For most federal situations the honest answer is that the arrangement should not be a referral fee at all. Two structures do the same job without the exposure. The first is employment: hire the business development capability, supervise it, and pay a mix of salary and results, which is what the bona fide employee exception describes. The second is a subcontract for real work. A partner who understands a customer's mission well enough to make a useful introduction almost always has scoped work to contribute, and buying that work at a negotiated price survives every rule above.
When neither applies and the payee is a genuine selling agency, document what makes it one: years in operation, the other principals it represents, staff, office, and the selling activity it performs. That file is the evidence behind the warranty the contractor signs in clause 52.203-5, and the time to build it is before award rather than during an inquiry.
One note on citations in 2026. The Revolutionary FAR Overhaul is reissuing large portions of the FAR in plain language, with agencies implementing through deviation text while formal publication proceeds, so section numbering and wording are moving in places. Verify the text your contracting activity uses. The foundations here sit in statute rather than regulation and have not moved: 41 U.S.C. 3901, 41 U.S.C. chapter 87, 41 U.S.C. chapter 21, and 31 U.S.C. 1352.
Bottom line
A referral fee is a question about three facts, not about a document. Who ultimately pays, whether the money is contingent on winning, and whether the payee sells for a living or simply knows someone. Get those right and the paperwork is one page. Get them wrong on federal work and the remedies reach the contract itself. The structures that hold up are unglamorous: an employee on payroll, an agency with a real business behind it, or a subcontract for work somebody performs. Write down the trigger, split earning from payment, exclude what must be excluded, disclose the connection. Everything else is negotiation.
Frequently asked questions
Only in narrow form. FAR 3.401 defines a contingent fee as any commission, percentage, brokerage, or other fee contingent on success in securing a government contract, and clause 52.203-5 requires the contractor to warrant that no person or agency was retained on that basis except a bona fide employee or bona fide agency. The clause goes into solicitations and contracts above the simplified acquisition threshold other than those for commercial products or services. Breaching the warranty lets the government annul the contract or recover the full fee.
FAR 3.401 describes an established commercial or selling agency, maintained by the contractor for the purpose of securing business, that neither exerts nor proposes to exert improper influence. The test is about the agency: whether it runs a real, ongoing selling business with staff, principals, and history. An individual with access to a program office and a percentage agreement generally does not meet that description.
Paying anyone at the prime for favorable treatment on a subcontract award falls inside the Anti-Kickback Act. FAR 3.502-1 defines a kickback to include any money, fee, commission, gift, gratuity, thing of value, or compensation of any kind provided for improperly obtaining or rewarding favorable treatment in connection with a prime contract or subcontract. Penalties reach ten years under 41 U.S.C. 8707, and civil recovery under 41 U.S.C. 8706 is twice the kickback plus a per-occurrence penalty. Buy scoped work at a negotiated price instead.
No. Section 15(a)(1) of the Securities Exchange Act, 15 U.S.C. 78o(a)(1), makes it unlawful to use interstate commerce to induce or attempt to induce the purchase or sale of any security unless registered as a broker or dealer, and the text carries no general exemption for a one-time introducer taking a percentage. How limited finders should be treated remains debated federally and is handled differently across states. Use securities counsel, not a customer-referral template.